Intermediate Accounting I Ch.13: Intangible Assets and Goodwill

Which kinds of intangible assets are assessed for impairment?

Both those with definite lives and those with indefinite lives.

Impairment loss in one-step test:

Carrying value minus face value

Noncash consideration of intangible assets:

Cash paid + fair value of noncash consideration or fair values of assets.

What is the exception for research and development costs?

Computer software.

After technological feasibility, research and development activity is allocated to

an intangible asset.

Computer software technological feasibility allows costs to be capitalized as

an intangible asset.

Impairment is recorded

annually

Organizational cost is expensed

as incurred.

Net identifiable assets =

assets minus liabilities.

Materials, equipment, and facilities acquired for particular research and development projects, with alternative future uses are recognized as

assets; expenses go to them and R&D expense.

Goodwill is recognized only when a

company is purchased.

Goodwill is the difference of

consideration minus face value of net identifiable assets.

Customer lists have the useful life depending on

customer relations.

Legal costs can be either

external lawyer or capitalize direct legal cost internal.

Useful life can be determined by

factors other than use or legal.

Goodwill is classified as

intangible asset, yet recorded separately.

Amortization expense, if not placed in accumulated amortization, is counted for in

operating cash flows in statement of cash flows, or operating expenses on income statement.

Copyright includes the right to

print, reprint, sell, or distribute copies & perform and sell work.

Research and development expensed during

product development.

Identifiable =

recordable.

Useful life may be gathered from

research and development.

Business combination:

Acquiring licenses, franchises, and other intangible assets through acquiring business.

Research and development:

Activities to create new products and processes, or improve existing ones, and to discover new knowledge that may be of value in future.

2 ways to establish technological feasibility:

Detailed program design and working model.

Bargain purchase:

Face value of net identifiable assets greater than consideration

Working model:

How a company finds consistency in product design confirmed by testing.

Qualitative factors affecting impairment of goodwill:

Macroeconomic conditions, industry & market considerations, cost factors, overall financial performance, relevant entity-specific events, reporting unit specific events, and a sustained decrease in share price.

Qualitative assessment of goodwill:

More likely than not impairment

Detailed program design:

Product design by company with skills, hardware, and software tech, confirmation of completeness of design by documentation and tracing of design to product specifications, and resolution of any identified high-risk development issues by coding and testing.

Cost of research and development services performed by another company is recognized as

R&D expense as incurred.

Intangible asset acquired for a specific research project with no alternative future use is recognized as

R&D expense as incurred.

Materials, equipment, and facilities acquired for particular research and development projects, with no alternative future uses are recognized as

R&D expense as incurred.

Salaries and wages of those engaged in research and development activities are recognized as

R&D expense as incurred.

Depreciation expense for assets in R&D is recorded as a

R&D expense.

Until technological feasibility, research and development activity is allocated to

R&D expense.

How often is goodwill impairment checked?

Same time annually.

Bargain purchase steps:

Subtract liabilities from assets to find face value of net identifiable assets, subtract that amount from cash outflow to get goodwill.

Which kinds of intangible assets are amortized?

Those with definite lives.

Carrying value:

What's left over after considering all debits and credits.

Intangible assets are always

acquired.

Intangible assets are recorded at

acquiring current cash-equivalent cost.

In the product release and sale of product, cost is allocated to both

amortization of intangible asset & non-R&D expense.

Straight-line amortization is used whenever

benefits from asset are unpredictable.

Carrying value =

book value.

Goodwill impairment happens when

carrying value plus goodwill is greater than fair value or purchase alone.

All intangibles are impaired

differently.

Computer software is allocated costs based on

establishing technological feasibility.

Reasonable allocation of indirect costs of a facility dedicated to R&D activities (rent, utilities, etc.) is recognized as

expense as incurred.

R&D costs are recorded as

expenses is incurred.

Intangible assets acquired for a number of research projects is recognized by`

finite or indefinite life intangible asset and amortization is a R&D expense.

Calculating for recoverability test:

future cash flows (FCF) < carrying value (CV) means impairment.

Indefinite-life tangibles and goodwills technically have no

future cash flows following effective measures.

All assets, including R&D, need

impairment.

Amortization is recorded either

in amortization expenses on income statement or accumulated amortization on balance sheet.

Gain or loss on sale of intangible assets is from

net proceeds of disposal minus adjusted book value.

When change in estimated life of intangible assets occurs, prior results are

not changed.

Intangible asset's life must evaluated by the

shortest amount, be it legal or useful life.

R&D costs are intended to bring about

significant improvements.

Organizational cost =

start-up cost.

If fair value is larger than carrying value

there's no impairment.

Identifiable assets:

Assets from contractual or legal rights, or are separable for other operations.

How indefinite life intangible assets undergo quantitative assessment?

Compares fair value to carrying value; if fair value is bigger, impairment.

Customer list:

Customer info including names and contact info.

Calculating impairment loss:

Fair value < carrying value means loss. Carrying value minus face value sums to loss.

Capital intangibles have 2 types:

Finite life and indefinite life.

Trademark:

Name, symbol, or other distinctive identity given to a company, product, or service.

Is useful life the same as asset life?

No.

Intangible assets have indefinite life when there are no

legal, regulatory, contractual, competitive, economic or other limitations.

Consideration for goodwill can include:

location, employees, development, and customer base; non-identifiable assets inseparable.

When goodwill should be reduced more than allowed,

make a note.

Gains on bargain purchase includes

other gains on income statement.

Projects are expensed as

used, no definite life.

Goodwill (formal definition):

Asset representing future economic benefits arising from other assets acquired in a business combination not individually identified and separately recognized.

Indefinite life:

Capitalize in BA, no amortization, and test for impairment annually.

Finite life:

Capitalize on balance sheet, amortization expense w/useful life, & test for impairment annually.

Goodwill useful life:

Continues as long as operations of business unit continues.

Licenses:

Contractual operating rights often granted by a governmental body.

Organizational cost:

Cost to get organization going.

How are amortization of intangible assets usually recorded?

Credit on intangible asset, debit to amortization expense or accumulated amortization.

Licenses' useful life:

Depends on agreed period, yet can be renewed endlessly.

Recoverability test of finite life intangible asset:

Discounted future net cash inflows compared to carrying value; if carrying value is bigger, impairment suggested.

Goodwill:

Excess consideration given above fair value of net identifiable assets when acquiring control of something from another company.

Patent:

Exclusive right recognized by law and registered with the U.S. Patent Office; enables holder to use, manufacture, sell, & control item, process, or activity covered by patent without interference by others.

Impairment:

Future cash flows are less than carrying value.

One-step test

If there's impairment; face value lesser than carrying value

Goodwill is amortized or impaired?

Impaired; tested at least annually.

Adjusted journal entry for goodwill's impairment:

Impairment loss debited, goodwill credited.

Impairment training step 2:

Impairment loss.

What assets have no recoverability tests?

Indefinite life intangibles and goodwills.

Intangible assets:

Insubstantial assets.

Acquired in-process research and development:

Intellectual property purchased as incomplete research and development projects, initially recorded as indefinite life intangible asset until project is done.

Raw materials used for more than 1 project goes into

Inventory - R&D

Franchise useful life:

Legal life set by contract, able to renewed endlessly.

Copyright:

Legal protection to literary, musical, artistic, and other similar authors.

Impairment testing for goodwill:

Minimum of annual qualitative assessment, then quantitative goodwill impairment test if needed.

Impairment testing for indefinite life tangible asset:

Minimum of annual qualitative assessment, then quantitative test for impairment if needed.

Can the goodwill account be reduced below zero?

No; write adjusted journal entry where amount equals zero.

Indefinite-life intangibles and goodwills tests:

One-step test.

Impairment loss goes on where on income statement?

Other losses; decreases income from operations, thus net income and comprehensive income.

7 types of intangible assets:

Patents, copyrights, trademarks, customers' list, licenses, franchise, & goodwill.

Useful life:

Period asset is expected to contribute directly or indirectly to future cash flows.

Typical costs for intangibles:

Purchase price, legal fees, and other incidents.

When R&D equipment is used, debit

R&D expense and credit accumulated depreciation of equipment R&D.

2 exceptions allowing R&D to be capitalized:

Raw materials used for more than one project & equipment used for more than one project.

2 Impairment testing steps:

Recoverability test and impairment loss.

Impairment testing for finite life tangible asset:

Recoverability test, then maybe an impairment test.

Impairment training step 1:

Recoverability test.

Advertising costs are expensed either

as incurred or first advertising happens. Might incur after recognizing revenues.

Costs to developing intangible assets are generally expensed

as incurred.

Copyright exists as long as the

author lives plus 70 years; unrenewable.

Impairment loss impacts the balance sheet by

decreasing net income, which decreases retained earnings, thus stockholders' equity, and, thus, stockholders' equity.

When preparing to submit patent, you need to pay

legal costs.

If useful life is not listed, assume

legal life is useful life.

R&D Inventory is expensed as

used.

R&D equipment is expensed as

used.

Franchise can be granted by government entities for

using public properties or making public services.

Trademarks can be renewed

every decade consistently; useful life may not be legal life.

3 classifications of intangible assets:

Finite life intangible assets, indefinite life intangible asset, and goodwill.

Franchise:

Franchisor gives right for franchisee to use name and specialized services or products.

Finite life intangible asset is evaluated for impairment if

carrying value is not recoverable.

Goodwill arises when

company acquires another company and purchase price exceeds fair value of net identifiable assets acquired from purchase.

Goodwill is seen from a

market perspective.

Difference in bargain purchase is called

negative consideration

Impairment training is for

tangible assets and intangible finite life.

Patents have shorter useful life because of

tech improvements eliminating competitive edge.

Patent enables holder to

use, manufacture, sell, & control item, process, or activity covered by patent without interference by others.